Healthy economic future takes change

Healthy economic future takes change

January 22
17:19 2013

The fiscal cliff has been pushed back a bit, but with Federal government revenues still only about 70 percent of spending, the deficit issue will continue to be debated for the rest of 2013.

While Republicans are fond of saying the US suffers from a spending problem, what we really have is a demographic problem.
The largest determinant of future deficits is Medicare and Social Security. And the source of deficits in those programs is an aging population with fewer workers per retiree. As a result, tax reform is going to have to be part of the discussion. Here are a few overlooked changes most economists would welcome.

1. Eliminate the mortgage interest deduction. When the federal income tax was adopted in 1913, interest paid by households on a mortgage could be deducted from taxable income.

The argument was that subsidizing homeownership in this manner would increase homeownership. Studies show that although it promotes debt and larger, more luxurious homes for the wealthy, it has zero effect on homeownership and most of the $90 billion in tax reduction goes to the wealthiest 20 percent of households.

To be fair to those who counted on the deduction when buying or building a house, the deduction should probably be phased out over a decade, but it should definitely be phased out.

2. Eliminate the health insurance subsidy. Employers started providing health insurance as an additional form of compensation during WWII.
In the 1950s, taxing this benefit was considered, but rejected as a means of promoting health insurance. According to Jonathan Gruber, economist at MIT, this subsidy costs the Federal government $250 billion per year, and most of this goes to households earning more than $100,000 per year.
Although the consequences of eliminating this subsidy would be more complicated and far reaching than the mortgage interest deduction, it should be eliminated as well.

3. Eliminate the corporate income tax. The corporate income tax brings in about $180 billion per year. Why so little, because corporations spend billions on accountants, lawyers and lobbyists to hide profits and have the tax laws modified in their favor.
The article entitled “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010” published by Citizens for Tax Justice details the extent of the problem.
Eliminating the corporate income tax and ending the multi-billion dollar tax avoidance industry is probably the most pro-growth tax policy that could be enacted.

4. Institute a carbon tax. That climate change is being driven by changes in the amount of CO2 in the atmosphere is now, scientifically speaking, settled.

Something needs to be done, and ideally we would find the lowest cost means of reducing the release of CO2 into the atmosphere.
The lowest cost means of getting a handle on this problem is a carbon tax, as it would encourage every user of carbon-based fuel to work on finding solutions to the problem.

The Brookings Institute has recently suggested a $20-per-ton tax on carbon released in the burning of fossil fuels, which would rise by four percent per year.

They suggest this might raise gasoline and electricity prices by about 10 percent and raise about $150 billion in revenue per year. While no one likes taxes, a carbon tax is superior to taxing labor, like income taxes, in almost every way.

This is just a short list. Increasing marginal tax rates is often debated and may need to be considered along with eliminating agricultural subsidies and reforming deferred executive compensation policy, but we have to start somewhere.

Overall, the net effect of these proposed changes would increase government revenue moderately, and not nearly enough to turn the tide on our growing debt. To do that will require large spending cuts, especially to Medicare and Social Security.

But if we are going to need to bring in additional revenue, we should at least endeavor to do so intelligently.

Jeffrey Rous is an associate professor of economics at UNT. He can be reached at jrous@unt.edu.

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